The SOFR Discount *
78 Pages Posted: 12 Jul 2022 Last revised: 23 Feb 2024
Date Written: February 2, 2024
Abstract
The transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) affects the reference rate of floating-rate debt worth trillions of dollars. We provide the first evidence highlighting a benefit of the benchmark transition for debt markets. Focusing on the primary market for dollar-denominated floating rate notes (FRNs), we compare the issuance spreads of FRNs linked to LIBOR and SOFR, issued by the same entity during the same month. After adjusting for the maturity-matched spreads from derivatives markets, we find significantly lower spreads for SOFR-linked FRNs. We link this SOFR discount to the enhanced price stability of SOFR-linked FRNs.
Keywords: Benchmark rates, floating rates, financial regulation, LIBOR, SOFR JEL: E43, G12, G18, G29
JEL Classification: E43, G12, G18, G29
Suggested Citation: Suggested Citation